Middlefield Market Commentary
Macro Update
by Dean Orrico President & CEO?and Rob Lauzon , Managing Director & CIO
The S&P 500 Index experienced an 8.5% drawdown between July 16th and August 5th. The sell-off proved to be short-lived, with the Index staging a V-shaped recovery and recapturing nearly all its losses. Although September is historically the worst month of the year, and volatility may return in the weeks ahead, we maintain a constructive view on the market over the medium term. This outlook is supported by three key supports that remain in place: solid earnings growth, goldilocks economic data and expected monetary easing.
Q2’24 was the best quarter of earnings growth for the S&P 500 in nearly three years. This trend is expected to continue with consensus estimates implying earnings to grow even faster over the next four quarters. This comes at a time when the Federal Reserve faces a challenging task of recalibrating its monetary policy. The risk of either delaying rate cuts or cutting them too quickly could lead to undesirable consequences, such as rising unemployment or reigniting inflation. We are currently more focused on growth statistics than inflation risks. From this perspective, we were happy to see the recent Q2 GDP print show continued economic growth of 3% in the United States driven by strong consumer spending. Ultimately, we expect the Fed to cut rates at a gradual pace starting in September with the magnitude of the first cut to be influenced by jobs data leading up to the meeting.
Real Estate
by Dean Orrico , President & CEO
REITs extended their solid performance into August, continuing the upward trend that began in late June. We’ve maintained for several months that the fundamentals across the real estate sector (ex-office) are as good as we’ve seen in years. Generally speaking, demand remains very strong while supply is constrained due to high construction and interest costs. Now that interest rates and yields are declining, a trend we expect to continue into 2025, investor interest and capital is now coming back into the REIT sector. We believe we’re in the very early innings of a trend which will see billions of dollars exit cash like alternatives (i.e. term deposits and money market funds) for equity income securities including REITs.
Since hitting its lows, the sector has gained 19%, reflecting the market's recognition of this underlying strength. With REITs still trading at attractive valuations relative to their historical norms, the sector offers a combination of income and growth. For investors seeking a balanced exposure to both income and capital appreciation, the case for REITs remains as strong as ever.
Healthcare
by Rob Moffat, CFA , Portfolio Manger
Healthcare continued to perform well in August (+5.1%), outperforming the broader market for the second consecutive month. Our healthcare ETF (TSX: MHCD) has returned nearly 20% year-to-date with its unit price trading at all-time highs. The sector’s resilience in the face of broader economic uncertainties highlights its defensive qualities and long-term growth prospects.
The Centers for Medicare & Medicaid Services (CMS) released the initial list of Maximum Fair Prices for the first 10 Medicare Part D drugs selected for price negotiations under the Inflation Reduction Act (IRA). The average discount of approximately 22% relative to current Medicare net pricing was in line with expectations. We believe the announcement should be viewed positively, as it demonstrates the IRA poses a manageable issue for drug manufacturers. Although we are increasingly comfortable with CMS’ negotiation framework for mature drugs, we remain focused on companies with multiple new product launches and deep R&D pipelines. Our top ideas in this space, which continue to align with this approach, include Eli Lilly, AstraZeneca, AbbVie, Merck, and Regeneron.
Infrastructure
By Rob Lauzon , Managing Director & CIO
Canadian pipeline companies continued their impressive performance in the second quarter. Pembina Pipeline (PPL) reported Q2 results above consensus and raised EBITDA guidance for 2024FY. PPL’s extensive network is well-positioned to capitalize on the growing production of oil and gas in Western Canada, evidenced by securing long term contracts and its accretive acquisitions over the past year. PPL’s focus on deleveraging its balance sheet and increasing shareholder returns further solidifies its financial position. Pembina’s recent acquisition of gas assets from Whitecap underscores its value in the midstream segment, as these assets will bolster its long-term take-or-pay contracts. Meanwhile, LNG Canada’s upcoming introduction of natural gas to its Kitimat facility marks a significant milestone in its journey to export made-in-B.C LNG by mid-2025.
Technology & Communications
By Shane Obata, CFA, MFin , Portfolio Manger
The tech sector is currently riding a wave of AI-fueled enthusiasm, with recent earnings reports from giants like Microsoft, Amazon, Google, and Nvidia painting a picture of impressive growth. Even so, questions linger about the durability of this AI spending surge. While the current exuberance is understandable, the true litmus test for AI's longevity lies in its ability to consistently deliver tangible business value, justifying continued expenditure.
Parallel to this dynamic is the evolution of large language models (LLMs) continues at a breakneck pace. Today's models, like GPT-4o, already highlight impressive capabilities, but experts predict even more dramatic advancements. Models with trillions of parameters, orders of magnitude larger than current ones, are on the horizon. Such colossal LLMs could revolutionize sectors from healthcare and finance to manufacturing and entertainment, but they also bring challenges in terms of computational resources and energy consumption. Balancing power with sustainability will be crucial.
Resources
By Dennis da Silva , Senior Portfolio Manager
The typical bar of gold weighing approximately 400oz, is worth more than US$1 million for the first time as the commodity pushed past the $2,500/oz mark in August. We believe gold is an asset class investors should be paying more attention to. The heightened level of geopolitical risk has foreign governments and central banks looking for alternatives to the U.S. dollar. At the same time, we’ve seen underinvestment in gold mine supply given increasing cost, time, and country specific risks to bring new mines into production. We expect this momentum in price to continue as we inch closer and closer to rate cuts from the Fed. The S&P/TSX Global Gold Index was up 0.9% in August, slightly underperforming the 2.2% increase in gold.
In the next few weeks, OPEC+ will make a difficult decision regarding supply additions. Increases are unlikely when you consider oil prices and spreads are currently about the same as when they agreed to the second set of voluntary cuts in November 2023. In addition, Saudi Arabia’s revenue from oil exports is at a 3-year low, making the decision to raise production even more challenging. However, pressure is on to allow planned supply hikes from the UAE and the recent curtailment of Libyan exports has conveniently provided cover for allowing these barrels to slowly enter the market. The S&P/TSX Capped Energy Index was down 2.3% during August as the 4.5% increase in NYMEX natural gas prices was offset by a 5.6% decline in oil prices.
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